Many opportunities to mine hidden gems

Glittering prize . . . it only takes one good trade to strike it rich.
Photo: Peter Braig

by
Justin Bailey

At first glance, microcap shares may not seem like the best choice for the prudent long-term investor. Many do not have revenue streams; some do not have approved products, and others are competing against large-cap incumbents.

But as any investor knows, where there are risks there are rewards and it only takes one good trade to strike it rich. A quick glance at some of the country’s biggest stocks including
Fortescue Metals
,
Cochlear
and
JB Hi-Fi
highlight the possible returns on offer.

Fortescue was trading at 50¢ just five years ago and it’s now $5.71. Cochlear listed on the exchange in 1995 at $2.50, it now trades at closer to $80. JB Hi-Fi listed in 2003 at $1.55 and is now changing hands for $17.81

Mongolian coal explorer
Hunnu Coal’s
shares have more than quadrupled since the company listed in February 2010. Hunnu’s market capitalisation is now $300 million and it has barely drilled more than a few holes.

But it may not have to do more than that to encourage a potential suitor to take the company out. It recently signed a memorandum of understanding to form a strategic partnership with Singapore mining giant Banpu Minerals.

Fund managers appear to like Hunnu’s prospects. Orbis has a 12.3 per cent stake in the company and Acorn holds 12.2 per cent.

Corporate activity in the coalmining sector has been running hot over the past couple of years as India and China try to lock up supplies. Rio Tinto’s recent bid for Riversdale Mining shows you don’t have to have established operations to become a takeover target. Those same dynamics are sure to help
Continental Coal
. The South African miner recently became a thermal coal producer and is targeting production of 10 million tonnes a year by 2015.

Continental Coal’s share price has dropped 19.1 per cent this year, opening up a buying opportunity. The company has a market capitalisation of $114 million. A little closer to home is
DeltaSBD
, a recently listed company with plenty of potential. DeltaSBD provides mining services to coalminers in NSW’s Hunter Valley and Queensland’s Bowen Basin.

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Since listing at 80¢ in December last year, shares in the company have slowly crept higher hitting 86¢. DeltaSBD has no substantial institutional holders on its register and is not covered by analysts.

Still on the mining sector and Perth-based
Maca
has been attracting plenty of attention. UBS recently became a substantial holder in the mining services company with a 7.8 per cent stake.

Shares in Maca have more than doubled in price since it listed on the exchange in October last year. The company says it expects its first-half performance to exceed expectations and it is hoping to post a $16 million net profit. Previous forecasts have been as low as $14 million.

Outside the mining sector there are plenty of other companies offering good returns. Biotechnology stocks have been experiencing something of a renaissance in recent times.

Fifteen years ago, Cochlear showed the possible returns on offer to investors and now companies like Mesoblast, Acrux and Starpharma are following in its footsteps. Starpharma is the smallest of the three with a market capitalisation of $216 million. But its stock could easily double as its first product –VivaGel –nears commercial release.

Starpharma listed in September 2000 but the stock has rarely exceeded its listing price. But with the commercialisation of VivaGel just around the corner it could be about to surge.

Southern Cross estimates the market for VivaGel, which is used to prevent sexually transmitted diseases, could be as high as $1 billion. “We anticipate Starpharma being re-rated by the market as commercial interest builds in its dendrimer products and technologies," Roberts says.

Another stock in the biotechnology space that is attracting interest is
Nanosonics
. The company’s ultrasound probe steriliser is expected to receive US Food and Drug Administration approval sometime this quarter

Nanosonics’ marketing partner for the probe is GE Healthcare, one of the world’s leading sellers of the devices. The potential market for the product is more than 100,000 units. About 200 million ultrasound procedures are performed in the US annually.